When buying your first home, one of the first decisions you’ll need to make is the choice of mortgage loan. While there are several options, conventional loans and Federal housing Administration or FHA loans are the two most common among home buyers. If you’re not sure which one is right for you then consider this.
5 By Which To Compare FHA and Conventional Loans
- Credit score – a credit score of 620 is required for a conventional loan whereas 580 is required for an FHA loan. However, at those levels, your minimum down payment on either loan would be 10% (see “down payment” below). Because of the lower credit score required, FHA loans are popular with first-time buyers as well as individuals in lower income brackets. However, the higher your credit score, the better your interest rate will be.
- Down payment – minimum down payment requirements for both types of loans are similar and can be as low as 3% for conventional loans and 3.5% for FHA loans. Plus, you’re allowed to receive 100% of your down payment as a gift from family members.
- Funding – FHA loans are government-backed loans that are intended to make home mortgage loans easier to obtain for lower-income individuals. Because of this, they have become the loan of choice for the first-time home buyer ever since the real estate market crashed in 2008. As subprime loans became harder to obtain, individuals with below average financial qualifications benefited from FHA loans.
- Interest rate – the interest rates on conventional and FHA loans are usually pretty close with FHA rates slightly lower. In either case, the interest right is primarily determined by your assets along with your credit score, down payment, and LTV ratio. Furthermore, interest rates often vary from one lender to the next. Thus, if you are looking to get the lowest interest rates, you may need to shop and compare. Additionally, you’ll need to ensure that the mortgage lender is reputed and licensed.
- Private mortgage insurance – borrowers must pay PMI with conventional loans until they have accumulated 20% equity in the property. However, putting 20% down on a conventional loan will eliminate having to pay for PMI. You can also reach that 20% by gaining equity as the value of your home increases or paying down the principal on the loan. If you have to pay PMI, it will cost you anywhere from 0.5% to 1.75% of the loan annually. On a $300.000 mortgage with 1% PMI, you’d be paying an additional $3,000 every year.